by Charlotte Wood
(last updated February 21, 2009)
There are so many different kinds of loans out there: mortgages, second mortgages, car loans, personal loans, student loans. However a home equity line of credit (also known as a HELOC) or a home equity loan, is different from them all. While HELOCs can be helpful in financing your home, you do need to approach them with caution. Before diving into a home equity loan you need to understand the risks involved.
Home equity loans come in either a regular installment loan (similar to your mortgage) or a line of credit which is like a credit card (you use this most often with home renovations. Also with the line of credit once you pay the money, the money is yours and doesn't go away with the last payment. The difference between a HELOC and any other kind of loan is that it uses your actual house as collateral. If you default on the loan, the bank takes your house, so if you can't pay off this loan then you're in a bit of trouble. Be willing to risk your house if you decide to venture a HELOC.
Home equity loans are actually versatile loans if you know how to fiddle with it. You can use the money to make improvements on your home (e.g. renovations), pay off credit card debt, or consolidate some of your other debt. I think the best use of home equity money is to improve your existing home through renovations and the like. Taking out loans to pay off other loans, especially when putting up your house for collateral, is a giant risk. (If you're thinking debt consolidation, investigate other options, get some financial counseling, and then make a knowledgeable decision).
Go for a home equity loan when you know exactly what you need. Again this is best for doing work on a house or even an emergency house fund. When shopping for equity loans, really do your homework. Know what you're looking for before you go in to the bank and if you're not sure, tell the lender what you want your result to be and he should be able to narrow down your options. Shop around before you sign anything. Compare rates, ask questions, and weigh the pros and cons. If you know what's out there then you can make the best choice.
Home equity loans can be great if it actually fits what you're looking for. If however you can't really risk your home, you might want to consider another option. Home equity loans are flexible and give you lots of room for the application of you money. Do your homework and know the risks, and then you'll be good to go!
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